Low-valuation Consumers Research Articles

Imperfect Targeting and Advertising Strategies

The ability to successfully target consumers has been substantially affected by recent developments in digital markets, such as improvements in tracking technologies or General Data Protection Regulation. In this paper, we set up a game theoretic model to examine the implications of such changes in targeting success on firms’ targeting strategies and profits. We explicitly consider that firms can target different consumer groups—that is, high- or low-valuation consumers—and that targeting is imperfect—that is, a firm may not reach the intended consumer. We find that a higher targeting success rate has a nonmonotone effect on firms’ profits—that is, lowering profits if targeting is rather imprecise but raising profits if targeting is relatively accurate. If the probability of successful targeting is low, firms target high-valuation consumers (competition for cherries). More fine-tuned targeting then amplifies competition and decreases profits. Instead, if targeting is sufficiently precise, more fine-tuned targeting increases profits because firms segment the market by targeting different consumer groups. Improvements in the targeting ability also have profound effects on the number of products a firm offers and on the profitability of offering products that appeal not only to a single consumer group. First, although increased targeting success raises the attractiveness of introducing an additional product, it also heats up competition. A firm may therefore optimally reduce the number of products it sells if targeting success increases. Second, if products have a broader appeal, market segmentation is more likely to occur. However, aggregate profits are lower compared with when products are narrow. This paper was accepted by Joshua Gans, business strategy. Funding: Financial support from the German Research Foundation [DFG Project 462020252] is gratefully acknowledged. Supplemental Material: The online appendices and data files are available at https://doi.org/10.1287/mnsc.2023.03632 .

Strategic fit revelation with advertising

Consumers are often uncertain about how a product fits their individual preferences before purchase. To resolve such uncertainty, firms can use fit-revelation activities such as sampling, product demonstration, and virtual showrooms. Recently, there is an emerging trend of combining product sampling with advertising (e.g., Amazon’s sampling-advertising initiative). Empirical research has shown that fit-revelation may enhance or weaken the effect of advertising. We contribute to the literature by developing an analytical model that links these interactions with the firm’s strategic decisions. We find that, interestingly, when fit-revelation enhances the effect of advertising, these two instruments are not necessarily complementary. Our study further characterizes the firm’s strategy space of whether to conduct fit-revelation alone, advertising alone, or both. We show that advertising may reverse the firm’s decision on whether to facilitate fit-revelation. Moreover, how complementarity/substitutability affects the optimal strategy depends on the types of ads. While substitutability denies the optimality of the joint strategy under informative ads, it fails to do so under persuasive ads. On the other hand, complementarity is necessary for the joint strategy to be optimal under informative ads, which is not the case under persuasive ads. Finally, we extend our analysis to targeted fit-revelation/advertising with heterogeneous consumers ex ante, in which case the firm may find it optimal to target low-valuation consumers. Given the latest trends and growing interest in the deployment of joint advertising and sampling, our study offers timely insights for practitioners.

Consumer preference analysis on the attributes of samgyeopsal Korean cuisine and its market segmentation: Integrating conjoint analysis and K-means clustering.

Samgyeopsal is a popular Korean grilled dish with increasing recognition in the Philippines as a result of the Hallyu. The aim of this study was to analyze the preferability of Samgyeopsal attributes which includes the main entree, cheese inclusion, cooking style, price, brand, and drinks using Conjoint Analysis and market segmentation using k-means clustering. A total of 1018 responses were collected online through social media platforms by utilizing a convenience sampling approach. The results showed that the main entrée (46.314%) was found to be the most important attribute, followed by cheese (33.087%), price (9.361%), drinks (6.603%), and style (3.349%). In addition, k-means clustering identified 3 different market segments: high-value, core, and low-value consumers. Furthermore, this study formulated a marketing strategy that focused on enhancing the choice of meat, cheese, and price based on these 3 market segments. This study has significant implications for enhancing Samgyeopsal chain businesses and helping entrepreneurs with consumer preference on Samgyeopsal attributes. Finally, conjoint analysis with k-means clustering can be utilized and extended for evaluating food preferences worldwide.

The Cost of Free: The Effects of “Wait-for-Free” Pricing Schemes on the Monetization of Serialized Digital Content

Leveraging a combination of analytical frameworks and empirical assessments, this study investigates the effects of wait-for-free (WFF) pricing schemes on the monetization of serialized, digital entertainment content, which has become increasingly pervasive on online platforms. WFF pricing is a strategy in which consumers are given the option to either wait a certain amount of time to acquire digital content at no cost or pay to consume it immediately. We evaluate the extent to which habit formation and present-biased preferences driven by the consumption of addictive stock affect individual consumers’ willingness to wait (or pay) for content, which, in turn, determines the efficacy of WFF pricing. We also examine the conditions under which consumers switch from waiting for free content to instantaneously purchasing content. Our findings indicate that WFF pricing increases the sales of serialized digital content, generating new demand from customers who would otherwise forgo participation in the market. In addition, the pricing design effectively generates sustained profits in the long run. We found that most consumers who initiate a purchase either upon initial market entry or upon switching continue to purchase as new episodes become available. Moreover, the results indicate that as a user accumulates free episodes of a specific series, given extended waiting periods, the likelihood of their conversion from a wait-for-free customer to an instant-purchase customer increases. In particular, WFF pricing effectively augments the willingness to pay of low-valuation consumers as habit formation builds up through time with the free consumption of serialized content. One free episode can elevate the likelihood of consumer purchase by up to 13%. However, as the number of free episodes consumed goes beyond a threshold, the likelihood of conversion decreases. We conclude with a discussion of managerial implications that can help content providers monetize their serialized digital content products.

Browsing versus Studying: A Pro-market Case for Regulation

Abstract We identify a competition-policy-based argument for regulating the secondary features of complex or complexly priced products when consumers have limited attention. Limited attention implies that consumers can only “study” a small number of complex products in full, while—by failing to check secondary features—they can superficially “browse” more. Interventions limiting ex post consumer harm through safety regulations, caps on certain fees, or other methods induce consumers to do more or more meaningful browsing, enhancing competition. We show that for a pro-competitive effect to obtain, the regulation must apply to the secondary features, and not to the total price or value of the product. As an auxiliary positive prediction, we establish that because low-value consumers are often more likely to study—and therefore less likely to browse—than high-value consumers, the average price consumers pay can be increasing in the share of low-value consumers. We discuss applications of our insights to health-insurance choice, the European Union’s principle on unfair contract terms, food safety in developing countries, and the shopping behaviour of (and prices paid by) low-income and high-income consumers.

Food Bank Donations and Retail Pricing

Food banks are an important part of the food-retailing setting. In 2018, food banks delivered a total of 1.4 billion pounds of donated food to 51.4 million clients. Perhaps more importantly, food banks serve as an important outlet for food that would otherwise be discarded in land-fills, or composted. Despite the economic and social importance of food banks, we know very little of their economic role in food distribution. In this article, we explain the existence of food banks as an essential mechanism to the food-retailing function, permitting food retailers to price-discriminate between high-valuation consumers who visit their stores, and low-valuation consumers who do not. Donating to food banks allows retailers to avoid destructive promotions for fresh products, provide an outlet for over-ordering to prevent stock-outs, and generates valuable tax write-offs. We show how secondary markets for perishable food products improve profitability, and we test the implications of our model using a unique data set of perishable food sales. We find that retailers that take advantage of secondary markets are more profitable than those that do not. Our findings explain the co-existence of traditional food retailers, and food banks.

The influence of coupon duration on consumers’ redemption behavior and brand profitability

This research proposes an analytical model of the joint optimization of coupon face value and duration together with the product price, and determines the impact of coupon design on consumers’ redemption behavior. A model of rational forward-looking consumers’ redemption behavior is derived that incorporates forgetting (to redeem) and stochastic redemption costs.Results show that when product price is exogenous, long-duration coupons may result in increased seller profits and always increase consumer surplus. Moreover, a one-period coupon is never optimal when (1) the difference in valuations for high-value (loyal) and low-value (non-loyal) consumers or (2) the coupon face value is larger than the redemption costs of high-value consumers. Long-duration coupons tend to be optimal when the level of recall of high-value consumers is sufficiently low, which reduces redemption by high-value consumers.Coupon duration together with face value plays an important role in coupons’ ability to price discriminate between different consumer segments and to avoid head-on competition with other sellers. Results can replicate empirically observed redemptions patterns, which has important implications for the strategic targeting of coupons to different consumer segments.A coupon may result in an increase or decrease in price. When the difference in valuation between high-value and low-value consumers is high (relative to the redemption costs), a seller can either reduce price and lower face value or increase coupon duration for the purpose of avoiding redemption by high-value consumers.

The Influence of Coupon Duration on Consumers’ Redemption Behavior and Brand Profitability

This research proposes an analytical model of the joint optimization of coupon face value and duration together with the product price, and determines the impact of coupon design on consumers’ redemption behavior. A model of rational forward-looking consumers’ redemption behavior is derived that incorporates forgetting (to redeem) and stochastic redemption costs. Results show that when product price is exogenous, long-duration coupons may result in increased seller profits and always increase consumer surplus. Moreover, a one-period coupon is never optimal when (1) the difference in valuations for high-value (loyal) and low-value (non-loyal) consumers or (2) the coupon face value is larger than the redemption costs of high-value consumers. Long-duration coupons tend to be optimal when the level of recall of high-value consumers is sufficiently low, which reduces redemption by high-value consumers. Coupon duration together with face value plays an important role in coupons’ ability to price discriminate between different consumer segments and to avoid head-on competition with other sellers. Results can replicate empirically observed redemption patterns, which has important implications for the strategic targeting of coupons to different consumer segments. A coupon may result in an increase or decrease in price. When the difference in valuation between high-value and low-value consumers is high (relative to the redemption costs), a seller can either reduce price and lower face value or increase coupon duration for the purpose of avoiding redemption by high-value consumers.

Vehicle scrappage incentives to accelerate the replacement decision of heterogeneous consumers

Vehicle scrappage subsidy programs have been widely applied by governments to replace old cars by newer, more fuel-efficient ones. While these programs have been implemented to provide motivation for replacing vehicles earlier, they may not be as effective as expected. From a cost-benefit perspective, the consumers who would have replaced anyway, even without the program, must be considered when evaluating the net benefits of the program. This requires accounting for variations in consumers’ willingness to replace. Considering consumer heterogeneity in net trade-in valuation, this study investigates a dynamic vehicle-replacement problem based on a life cycle optimization (LCO) approach. We theoretically demonstrate that although increasing the subsidy level does motivate low-value consumers to replace earlier, it also induces consumers with a high net trade-in valuation to replace later in order to become eligible for the subsidy program. We have also developed a simulation program based on real data, to demonstrate the application of our general model. According to the simulation results, ignoring consumer heterogeneity could result in an overestimation of the net benefits of the scrappage program.

Allowing Consumers to Bundle Themselves: The Profitability of Family Plans

Telecommunications service is an important and growing market, with worldwide revenue exceeding $2.2 trillion in 2016. In the U.S. market, the total number of mobile wireless connections has grown from 279.6 million in 2008 to 396 million in 2016. All the firms in this market offer consumers an option of purchasing either an individual plan or a family plan. Whereas a menu of individual plans can be thought of as a means to segment the market, the theoretical challenge is to understand how a firm stands to benefit from adding family plans to its product mix. In this paper, we use a game-theoretic framework to explore the role of family plans. Interestingly, we find that even when a family plan does not draw in any new consumers, a firm can still benefit from offering these plans. This occurs primarily because a family plan enables the firm to price discriminate more effectively. In particular, because some consumers can bundle themselves and join a family plan, the firm is able to charge a higher price to single high-valuation consumers who are unable to be part of a family. Furthermore, the presence of a family plan can have a negative impact on the plan offered to single low-valuation consumers who now have to pay a higher overage price. We also show that not all family plans are profitable and that the profitability depends on the sizes of different types of families. The online appendices are available at https://doi.org/mksc.2018.1121 .

Upgrading Heterogeneous Consumers

We study how a durable-goods monopolist upgrades heterogeneous consumers in an infinite horizon model of quality growth. While unable to charge consumers based on their purchase histories, the monopolist may engage in both inter- and intra-temporal price discriminations: charge different prices for goods of the same quality over time and offer different buyback prices for earlier, lower quality versions. First, we consider that there is a frictionless secondhand market such that consumers are anonymous. The monopolist always keeps high-value consumers abreast of the latest development. Moreover, when consumers are similar, the monopolist also upgrades low-value consumers at the same pace as the high-value ones. Otherwise, the monopolist completely ignores low-value consumers and focuses only on the high-value ones. Second, we consider where there is no secondhand market and consumers are semi-anonymous. If consumers and the monopolist are impatient, the outcome is the same as in an anonymous market. Otherwise, besides the efficient pooling equilibrium, there are three interesting inefficient upgrade patterns where high-value consumers always upgrade every period: the low-value consumers (1) keep a constant quality difference from the high-value ones, (2) upgrade in cycles but below the quality frontier, and (3) upgrade to the frontier in cycles.

Pricing with Prescheduled Sales

In this paper, I introduce a framework of price promotions by firms that preschedule their sale dates. I set up a dynamic model of demand accumulation in which high- and low-valuation consumers enter the market every period. The high-valuation consumers buy immediately and leave the market; the low-valuation consumers accumulate while waiting for the sale price. The firms schedule the dates of their promotions in advance. I find that often they use mixed strategies, choosing the future promotion period according to a probability distribution function. If the firms can cancel their prescheduled sales, typically they can wait longer until holding sales by shifting the probability distribution towards later periods. Scheduling promotions in advance increases the firms’ profits in comparison to the case when the promotion decision is made in the period when the promotion is offered. Data and the online appendix are available at https://doi.org/10.1287/mksc.2017.1052 .

The Cost of Free: The Behavioral Economic Effects of 'Wait-for-Free' Pricing Schemes on the Monetization of Hedonic Digital Content

Leveraging a combination of analytical frameworks and empirical assessments, this study investigates the effects of wait-for-free (WFF) pricing schemes on the monetization of serialized, pleasure-seeking digital content that has become increasingly pervasive in online platforms. WFF pricing is a strategy in which consumers are given the option to either wait for a certain amount of time to acquire indulgent digital content at no charge or pay to consume it immediately. We evaluate the extent to which habit formation and present-biased preferences driven by the consumption of addictive stock affect individual consumers’ willingness to wait and pay for content, which, in turn, determines the efficacy of WFF pricing. We also devote attention to consumer switching from awaiting free content to instantaneously consuming through purchase under the scheme of interest. The findings indicate that WFF pricing increases sales from serialized digital content, generating new demand from customers who would otherwise forgo participation in the market. In addition, the pricing design effectively secures sustained profits over long periods. We found that approximately 80% of consumers who initiate purchase either upon initial market entry or upon switching continue to purchase as new episodes become available. Moreover, we found that as a user consumes an accumulation of freely available episodes given extended waiting, the risk of conversion from delayed gratification to purchase increases. In particular, WFF pricing effectively augments the willingness-to-pay of low-valuation consumers as habit formation builds up through time with free consumption of serialized content. One free episode can elevate the likelihood of consumer purchase by up to 28%. However, as the number of free episodes consumed upon waiting goes beyond a threshold, the risk of conversion decreases. The analytical and empirical findings offer valuable insights into how consumers’ unique behavioral patterns (i.e., habit-formation and present bias) affect their willingness to pay for highly addictive digital goods. We conclude with a discussion of the pricing mechanism’s application in other contexts wherein consumers are willing to pay for immediate satisfaction rather than wait for complementary consumption.

Is Voluntary Profiling Welfare Enhancing?

Although consumer profiling advocates tout benefits from personalization, consumer advocacy groups oppose profiling in online markets because of concerns about privacy and price discrimination. Policies such as opt-out or opt-in that provide consumers the option to voluntarily participate in profiling are the favored compromise. We compare voluntary profiling to no profiling and show that voluntary profiling leads to some counterintuitive results. Consumers that do not participate in profiling and some that participate are worse off under voluntary profiling. Neither social welfare nor aggregate consumer surplus is necessarily higher under voluntary profiling; even when voluntary profiling leads to an increase in social welfare, it may come at the expense of consumer surplus. If the seller cannot price discriminate and charge only a uniform price for everyone or the seller can only charge different prices based on the consumer's participation status, then aggregate consumer surplus under voluntary profiling is higher and a reduction in privacy cost has a positive impact on all consumers as well as the seller. However, when personalized pricing is possible, reducing privacy cost alone may reduce aggregate consumer surplus. The primary reason for these results is that voluntary profiling allows the seller to identify high valuation consumers that have no incentive to participate and set a higher price for them (compared to no profiling) while simultaneously benefitting from the profile information of low valuation consumers that participate. However, a positive privacy cost mitigates the participation incentives of even low valuation consumers and hence sellers' ability to engage in price discrimination.

Search for Information on Multiple Products

We develop a framework for continuous search for information on a choice set of multiple alternatives and apply it to consumer search in a product market. When a consumer considers purchasing a product in a product category, the consumer can gather information sequentially on several products. At each moment, the consumer can choose which product to gather more information on and whether to stop gathering information and purchase one of the products or to exit the market with no purchase. Given costly information gathering, consumers end up not gathering complete information on all the products and need to make decisions under imperfect information. Under the assumption of constant informativeness of search, we solve for the optimal search, switch, and purchase or exit behavior in such a setting, which is characterized by an optimal consideration set and a purchase threshold structure. This paper shows that a product is only considered for search or purchase if it has a sufficiently high expected utility. Given multiple products in the consumer’s consideration set, the consumer only stops searching for information and purchases a product if the difference between the expected utilities of the top two products is greater than some threshold. Comparative statics show that negative information correlation among products widens the purchase threshold, and so does an increase in the number of the choices. Under our rational consumer model, we show that choice overload can occur when consumers search or evaluate multiple alternatives before making a purchase decision. We also find that it is optimal for a monopolistic seller of multiple products to facilitate information search for low-valuation consumers and obfuscate information for those with high valuations.This paper was accepted by Eric Anderson, marketing.

Competing for Low-End Markets

Recent business research points to the fortune awaiting to be tapped in low-end markets. In this paper, we investigate how the size of the low-end market influences a firm's profits and the pioneering firm's quality choice. As low-valuation consumers increase in a market, on average, consumers' willingness to pay decreases. This may lead us to expect firms' profits to decrease as the size of the low-end market increases. Our analysis shows that, if the size of the low-end market is below a threshold, an increase in the size of the low-end market may actually dampen price competition and improve profits, as firms can then strategically choose their quality levels such that their products are more differentiated. Conventional wisdom also suggests that the pioneering firm will offer a higher-quality product and earn more profits compared with the later entrant. In contrast to this notion of quality advantage, our analysis identifies circumstances in which a pioneer can offer a lower-quality product and yet earn more profits. An experimental test lends support for some of our model's predictions. We further extend the model to consider markets with multiple firms, firms with multiple products, and consumers with limited purchasing power.

Unpriced quality

A monopolist charges the same price for differentiated products when high quality products are likely to be assigned to low valuation consumers. The argument explains the use of ‘unpriced quality’ for concert tickets, movie theaters, and elsewhere.

A theory of clearance sales

Clearance sales are widely used by firms as an intertemporal selling policy, in particular in markets where firms face demand uncertainty and need to choose capacity in advance. Clearance sales consist in charging a high price initially but then lowering the price in the sales period. High-valuation consumers purchase the good at the high initial price so as to avoid rationing at the low price, while low-valuation consumers wait for the price to drop. We develop a simple model of intertemporal monopoly pricing under demand uncertainty, and show that clearance sales may be the optimal intertemporal selling policy. In this article, we derive the optimal selling policy of a monopolist who faces uncertainty about the level of demand. In contrast to much of the literature, we show that uniform pricing is not necessarily optimal. The optimal selling policy may instead involve clearance sales: the monopolist commits to supply only a limited quantity, and then charge a high price in the first period (palatable to high-valuation consumers) and a low price (affordable to low-valuation consumers) in the last period. The premium associated with the rent offered to consumers that buy at the high price and the probability of being rationed at the low price induce all high-valuation consumers to separate themselves and purchase the good in the first period. In contrast, lowvaluation consumers purchase the good in the last period but are rationed with an optimally determined probability.

Perfect price discrimination with costless arbitrage

The ability of a monopoly seller to prevent resale is often presented as a necessary condition for first degree price discrimination. In this paper, we explore this claim and show that, even with costless arbitrage markets, price discrimination may continue to be both feasible and profit maximizing despite potential resale. With finite numbers of consumers, arbitrage markets may be ‘thin’, in the sense that there can be too few low-valuation consumers to supply high-valuation consumers. We examine both ex ante and ex post arbitrage markets and show how a monopoly can exploit potential ‘thinness’ to profitably price discriminate. In each case, we present sufficient conditions for equilibrium price discrimination. We note that the form of such discrimination depends on the nature of the arbitrage market and consider business strategies that a monopoly might adopt to exacerbate market thinness. Our results show how market depth and the effectiveness of arbitrage can be the key elements for price discrimination, rather than the per se prevention of reselling.

Selling to Consumers with Endogenous Types

For many goods (such as experience goods or addictive goods), consumers' preferences may change over time. In this paper, we examine a monopolist's optimal pricing schedule when current consumption can affect a consumer's valuation in the future and valuations are unobservable. We assume that consumers are anonymous, i.e. the monopolist can't observe a consumer's past consumption history. For myopic consumers, the optimal consumption schedule is distorted upwards, involving substantial discounts for low valuation types. This pushes low types into higher valuations, from which rents can be extracted. For forward looking consumers, there may be a further upward distortion of consumption due to a reversal of the adverse selection effect; low valuation consumers now have a strong interest in consumption in order to increase their valuations. Firms will find it profitable to educate consumers and encourage forward looking behavior.